Emerson Outperforms, Raises Outlook - Analyst Blog

The company's expanded results were derived from a continued recovery in the global markets, which is expected to continue for the next several years. Emerson does not expect to see a double dip recession in its end markets.

Total Revenue

Total revenue of $5.6 billion, up 11% year over year, was in line with the Zacks Consensus Estimate for the quarter. Excluding 3% benefit from acquisitions and 1% from foreign currency exchange, revenue increased by 7%.

Emerson’s efforts to strengthen its performance and expand in key markets globally have paid off, with revenue growth accelerating in the US (up 11%) as well as in Europe (up 9%). In Asia, revenue continued to increase, reflecting growth of 3%.

Segment Performance

Revenue increased in all its segments during the quarter, with its Climate Technologies segment showing the highest growth rate of 29% year over year. This was followed by Industrial Automation which grew at 18%, Application and Tools at 10% and Network Power revenue growth of 7%. Emerson’s Process Management segment brought up the rear, growing just 2%.

Revenue growth in Climate Technologies was driven by the company’s strong performance in Asia due to stimulus programs and recently enacted higher-efficiency standards in China. Sales also improved in the US and Europe.

In the Network Power segment, growth was solid in the earlier cycle embedded power business. However, the segment witnessed weaker sales in Asia in comparison with the prior-year quarter. Though the company recorded solid growth across the professional tools, motors and appliance businesses in Application and Tools segment, this was partially offset by weakness in residential storage.

Process Management segment orders continued to increase during the quarter, including entering into an important contract with Shell. The segment will work as the main automation contractor for Shell’s floating LNG (liquefied natural gas) facility, potentially the world’s first floating LNG development.

Margins

The company’s operating margin increased to 18.0% from 14.7% in third quarter of 2009, benefiting from higher sales volume, new product and technology programs, and Emerson’s aggressive global restructuring and repositioning efforts.

Benefits from Emerson’s restructuring efforts and cost initiatives increased the operating margins in all its segments: Climate Technologies' margin was 20.1% (up 4.4 points), Industrial Automation's margin was 12.8% (up 7.1 points), Application and Tools' margin stood at 18.0% (up 4.0 points), Network Power's margin came in at 12.8% (up 2.4 points) and Process Management's margin was 20.6% (up 5.8 points).

Balance Sheet and Cash Flow

Cash and cash equivalents were $1.4 billion with long-term debt of $4.5 billion and shareowner’s equity of $8.8 billion.

The company generated operating cash flow of $703 million during the quarter. With capital expenditures of $122 million, free cash flow amounted to $581 million.

Outlook

The company’s results for the quarter are quite impressive, supported by improvement in the global market environment. The improving business environment and increase in order rates, led the company to raise its EPS guidance for fiscal 2010. Emerson expects full year earnings per share in the range of $2.60 to $2.70, excluding impacts from its offer to purchase Chloride Group plc or any potential divestitures of LANDesk or North American motors and controls businesses. Underlying sales growth will likely remain flat. Operating profit margin is expected to be in the range of 16.2% to 16.5%.

The company continues to invest in breakthrough technologies, expand its geographic presence and improve the cost structure of the business, both organically and through acquisitions. The addition of Chloride will help Emerson to further expand its activity worldwide and broaden its portfolio of power supply products.

We anticipate that the emerging markets will continue to outperform mature markets and could represent a significant portion of the company’s total sales. Furthermore, the emerging markets could recover faster than the US and Europe. Major competitors of Emerson are ABB Ltd. (ABB), General Electric Co. (GE) and Hitachi Ltd. (HIT).

Based in St. Louis, Missouri, Emerson Electric Co. is a diversified global manufacturing and technology company. It offers a wide range of products and services in the areas of process management, climate technologies, network power, storage solutions, professional tools, appliance solutions, motor technologies, and industrial automation.

We currently maintain our Neutral recommendation on Emerson Electric Co, with a Zacks #3 Rank over the next one-to-three months.